How are asset servicers progressing in their digitalization efforts?

Either as a mechanism to improve business-related processes, or as an offering in and of itself, there are great benefits to be unlocked by going digital – this much is clear. Technologies such as work flow automation, artificial intelligence (AI), distributed ledger technology (DLT) or blockchain, and infrastructure such as the cloud and  data fabric, are increasingly being used to enhance business agility, efficiencies, decrease costs, improve customer experience, reduce human errors, and so much more. What are some of the trends in digitalization emerging amongst Luxembourg’s asset servicers?

Last year we launched research on the adoption and impact of digital technologies in asset servicing1. What we found was a shared belief among asset servicers that the future of asset servicing would be enabled through technology, data and value-added services. It also became clear, however, that adoption of advanced technologies was fragmented: industry players use a wide range of tools each for a different set of needs. In fact, the majority of asset servicers (75%) perceived their digital maturity as limited to specific functions or departments, while only one-fifth cited the maturity of their business as fairly advanced. This led to the rise of so-called “digital frictions”, making the transformation journey operationally and financially burdensome for many businesses. It was also found that the approach to digitalization for some was approached out of necessity (error-driven), with a focus on fixing immediate issues rather than considering ways to enhance the entire value chain. A few months down the line, it is a good time to take stock. Herewith a light scan of the digital technologies asset servicers in Luxembourg have recently started using to grow, innovate and create value for end clients.

Increased use of data management platforms

There is a growing appreciation for the importance of data and data management tools, evidenced by key acquisitions of and partnerships with analytics software providers. Such providers typically push the “single source of truth” narrative, using end-to-end data integration, management and reporting capabilities to combine data from multiple sources into one data model in the middle or back office. This need for integration largely came through asset servicers experiencing data silos. Now most asset servicers are looking to leverage new data platform tools like Microsoft Data Fabric, Snowflake etc. and bring value from the data.

While some firms use technology to manage data broadly, others are inclined to adopt systems for a specific purpose, like tax or accounting. Straight-through processing (STP) and its capacity for scaling, has added benefits for fund accounting, investment accounting, NAV calculations and trading elements. Specific purpose technology solutions like these are frequently sought out through partnerships with fintechs, which enable the asset servicer to enhance their service by leveraging off pre-existing, comprehensive and sophisticated solutions.

In addition, with data we also see lots of interest in generative AI, which asset servicers are leveraging to offer new services or enhance existing ones, such as reading prospectus, investment restriction monitoring, ESG data extraction, contract life-cycle automation and automation of back-office functions.

Focus on enhancing the client experience

Digital technologies which improve the B2B client experience have seemingly become a priority for a handful of asset servicers. Some use cases we are seeing are platforms allowing market participants to send orders directly via order management systems and  peer-to-peer financing systems. In most scenarios, businesses capitalize on being able to remove or reduce the involvement of the “middle-man”, allowing better management and oversight of transactions between firms. Additional benefits of such technologies are the ability for firms to customize workflows and create a seamless user experience.

The emergence of digital asset platforms with traditional asset servicers

At this point, the demand for crypto-assets from asset managers and investors remains relatively niche, notably due to the lack of hindsight in trading crypto-assets and related legal matters. That said, major traditional asset servicers have kicked off their journey into the digital asset space. The development of crypto-asset servicing capabilities, including trading, custody and post-trade services, forms the prerequisite infrastructure for wider engagement, which is expected to be eased by the DLT pilot regime2. We already see the preparedness of certain actors improving: platforms securing administration and custody of digital assets, collateral management, automated corporate action processing, dividend payments and smart contract management; offers of digital asset issuance and tokenization services; and implementation of interfaces with multiple blockchains.

Certain asset servicers have launched their digital asset custody platforms first in the US market and for a subset of their clientele, which could be explained by regulatory or demand reasons. For example, 16% of Americans3 are invested in crypto, compared to only 10% of Europeans4. Usually these platform solutions are developed in close cooperation with leading fintechs to ensure compliance, sufficient security, scalability and reversibility which are leading client priorities. The way blockchains work also requires current operational risk models to be adapted.

This growing involvement of asset servicing giants which are familiar with heavy regulatory and control constraints could be the stepping stone to bring back investor confidence and take it to the next level, which will be necessary to deepen the virtual asset market. While policymakers embedded a good dose of proportionality to preserve smaller actors’ capacity to innovate, there is little doubt that the Markets in Crypto-Assets Regulation (MiCAR) will impose challenging hurdles for start-ups which are less accustomed to regulatory burden. To a certain degree, this could fuel a selection/acquisition/concentration process in the sector.

On another note, it should also be mentioned that while demand for digital assets may be muted, the underlying digital technologies like DLT/blockchain are increasingly being used for reasons outside of creating and distributing digital assets. In a nutshell, these technologies create a new, faster, more secure, reliable, immutable and transparent way of transacting/processing. By removing the need for third-party intermediaries/oversight, DLT/blockchain can potentially lower transaction fees and processing costs, so we see many asset servicers and managers alike exploring how such technology can be fully utilized or adopted for operational reasons.

Other IT trends

Furthermore, actors are looking to modernize their architecture leveraging Cloud platforms, which not only helps them manage their infrastructure well, but also allow agility for the business to offer new services and reach more clients. Where some firms continue to digitalize using SaaS tools, for functions like AML/KYC and account or invoice management (for example), others have looked to launch new tools to help manage emerging topics such as ESG risk monitoring and reporting.

How EY can help

Our expertise lies in assisting you in evaluating your digital maturity compared to your peers and devising a comprehensive plan of action. We provide valuable resources and tools that aid in identifying use cases throughout the entire asset servicing value chain, highlighting areas where digitalization can provide significant value. Additionally, we support in identifying potential product concepts and strategies for monetizing asset servicing. We leverage the power of our extensive alliance network and collaborate with leading technology platform providers to deliver robust solutions and help implement this solution considering the security and privacy principles in mind..